U.S. poised for stronger growth in 2014, Fed to taper by March: Reuters poll

WASHINGTON (Reuters) - U.S. growth is set to accelerate in 2014 as the headwinds from a tightening of fiscal policy fade, giving the Federal Reserve room to start dialing back its monetary stimulus, a Reuters poll showed.

From employment to consumer spending and housing, the foundation is being laid for sustained strong growth, economists said when surveyed.

“The fiscal restraint in 2014 will be significantly less than in 2013,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Uncertainty has hurt the economy over the last few years and as it fades, that should provide a lift to growth next year.”

The poll of more than 60 economists taken this week forecast GDP growth stepping up to a 2.5 percent annualized rate in the first quarter of 2014, and reaching 3 percent by year-end.

Growth in the final three months of this year is forecast at a pedestrian 1.5 percent pace, largely because businesses are expected to unwind some of the third-quarter’s massive inventory build-up, which pushed GDP growth to 3.6 percent.

Acrimonious budget negotiations over the past few years, which have yielded tighter fiscal policy, have constrained the economy.

But congressional negotiators reached a budget deal on Tuesday that would end three years of impasse and fiscal instability in Washington.

The $85 billion accord, which still has to pass through Senate and the House of Representatives, would fund the government through 2015 and roll back some of the unpopular automatic spending cuts known as the sequester.

A diminishing fiscal drag is expected to unleash pent-up demand from both households and businesses next year.

“A modest pick-up in business fixed investment, a resilient recovery in housing and deleveraged households are the keys to this rebound,” said Lewis Alexander, chief economist at Nomura Securities International in New York.

“However, we do not expect the pick-up in growth to be strong enough to return the economy to full employment within the forecast horizon.”

For all of 2014, the U.S. economy is expected to grow 2.6 percent, up from 2.5 percent in the November poll and faster than the 1.7 percent forecast for the whole year.

Most economists say the brighter growth outlook should provide the Fed with cover to start tapering its monthly bond purchases in March, but an announcement at the central bank’s meeting next Tuesday and Wednesday cannot be ruled out.

Thirty-two economists expect the U.S. central bank to act in March, while 22 said it would scale back its $85 billion monthly bond-buying program in January. Only 12 economists expected an announcement next week.

Still, expectations for an earlier move are rising. One month ago, 37 anticipated tapering to start in March, 16 said January and only three saw a December taper.

The shift toward a December announcement reflects solid job gains in November, which were accompanied by a substantial drop in the unemployment rate.

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While growth is forecast to accelerate through 2014, job gains are not expected to pick up much.

“Because employment gains have outpaced real GDP growth for much of this recovery, likely due to a ‘catch up’ effect of employment to output, we do not expect much of a pickup in payroll growth next year,” said Sven Jari Stehn, an economist at Goldman Sachs in New York.

The survey forecast non-farm payrolls averaging 190,000 during the first quarter of 2014, rising to an average of 208,000 in the final three months of the year. The findings are little changed from November’s poll. Monthly job gains averaged 193,000 in the three months through November.

The unemployment rate was expected to flirt with the 6.5 percent level that Fed officials have said would trigger discussions over when to raise interest rates from near zero.

In the fourth quarter of next year, the jobless rate is seen averaging 6.6 percent. It is expected to drop to an average of 6.5 percent in the first three months of 2015. That is down from the 7.0 percent rate reported for November.

Given the expected decline in unemployment, economists say the central bank will need to strengthen its forward guidance on rates to avoid a tightening of financial markets when it begins to reduce its bond purchases.

Despite the improvements in growth and employment, inflation was seen remaining benign, a wild card in the Fed’s decision on its monetary stimulus.

“Inflation is likely to remain stuck close to 1 percent for an extended period of time,” said Ethan Harris, global economist at Bank of America Merrill Lynch in New York. “Global pressures have faded as commodity markets cool and emerging markets slow down. There is abundant spare capacity.”